Quasi-fiscal expenditures

Quasi-fiscal expenditures (QFEs), also known as off-budget expenditures, refer to spending by state-owned enterprises (SOEs) or other government-related entities on behalf of the government that is not recorded in the national budget. This can include payments for social services, public infrastructure, fuel subsidies, defence and debt servicing. In many countries, QFEs can have a significant impact on the economy and on the government’s fiscal position. Although such expenditures may serve public purposes, they are often undertaken outside standard budgetary processes and oversight mechanisms. 

The International Monetary Fund’s (IMF) Manual on Fiscal Transparency highlights the importance of identifying and quantifying quasi-fiscal activities. When QFEs are not transparently disclosed or properly accounted for, they can undermine fiscal discipline, aggravate debt crises, reduce accountability and create opportunities for misuse of public funds. In the extractive sector, QFEs pose challenges due to the large revenues involved and the often-opaque roles of SOEs in managing these revenues.

When public spending lacks public oversight and robust auditing mechanisms, expenditures can be subject to corruption and mismanagement. In some cases, they are undertaken at a loss or below the usual rate of profit. QFEs are often considered sub-optimal compared to fiscal expenditures reported in the national budget, which usually has parliamentary oversight. 

Requirement 6.2 of the EITI Standard requires implementing countries to include disclosures from SOEs on their QFEs. The objective is to ensure that where SOEs undertake extractive-funded expenditures on behalf of the government that are not reflected in the national budget, these are disclosed to ensure accountability in their management.

This note provides step-by-step guidance to multi-stakeholder groups (MSGs) on how to identify, categorise and disclose QFEs in accordance with Requirement 6.2. It includes key considerations for each step of the process, highlights examples from EITI implementing countries and offers references to relevant international guidance.

 Source: Based on the International Budget Partnership (2014). The Hidden Corners of Public Finance.

The objective of this requirement is to ensure that where state-owned enterprises (SOEs) undertake extractive-funded expenditures on behalf of the government that are not reflected in the national budget, these are disclosed to ensure accountability in their management. 

a) Where state participation in the extractive industries gives rise to material revenue payments, implementing countries are required to include disclosures from state-owned enterprises (SOEs) on their quasi-fiscal expenditures. The multi-stakeholder group must develop a reporting process with a view to achieving a level of transparency commensurate with other payments and revenue streams, and should include SOE subsidiaries and joint ventures.

Disclaimer: Please refer to the latest edition of the EITI Standard online for the most up-to-date language of this requirement.

The first step for the MSG is to agree on a clear and practical definition of QFEs. This definition should reflect the minimum scope described in the EITI Standard and be tailored to the national context. 

According to the EITI Standard, QFEs include public expenditures undertaken by SOEs on behalf of the government, funded by extractive revenues, and not recorded in the national budget. These typically include spending on social services, public infrastructure, fuel subsidies and debt servicing. When agreeing a definition of QFEs, the MSG is encouraged to explain its rationale.

The MSG should clearly distinguish QFEs from: 

• Social expenditures by companies or SOEs not undertaken on behalf of the state (Requirement 6.1)
• Infrastructure or services provided in exchange for oil, gas or mining rights or the physical delivery of such commodities (Requirement 4.3).

The IMF’s Manual on Fiscal Transparency (2007) provides helpful guidance and a typology of quasi-fiscal activities. According to the manual, budget documentation should include statements on the purpose, duration and intended beneficiaries of each quasi-fiscal activity. The information should be based on submissions from the agencies that carry out the expenditure. Public corporations should disclose non-commercial services provided at the government’s request or lending to other state-owned bodies. ¹  These disclosures can also be found in publicly available budget reports, SOE annual reports or financial statements, which can help the MSG identify relevant QFEs linked to extractive revenues.

Types of quasi-fiscal activities and examples (adapted from the IMF 2007):

Source: IMF (2007) Manual on Fiscal Transparency: 2007 Revised Edition.

Once a national definition of QFEs has been agreed, the MSG should identify and assess all extractive revenues retained and used for spending outside the national budget. This step involves determining which expenditures qualify as quasi-fiscal based on the agreed definition and whether they represent activities normally undertaken by the government. Key tasks include: 

• Conducting a comprehensive review of all extractive revenues collected by government or quasi-government entities, particularly SOEs;
• Determining whether these revenues are retained and used for off-budget spending;
• Reviewing the nature of such expenditures to assess if they meet the criteria for QFEs;
• Considering whether the expenditures involve public service delivery, subsidies or other functions typically carried out by government entities;
• Including revenue flows of uncertain status within the scope of the review.

Useful sources include national budget documents, SOE annual reports, financial statements and scoping studies. Consultations with national experts such as representatives from the IMF, the Ministry of Finance, public auditors or academics can help validate the classification.

The MSG should clearly document the rationale for considering specific expenditures as quasi-fiscal, referencing its definition and classification criteria. This rationale should be included in MSG meeting minutes and reflected in EITI reporting.

The MSG should design a reporting process that ensures complete and disaggregated disclosure of QFEs. In undertaking this step, the MSG should first review existing systematic disclosures of QFEs funded by extractive revenues. Often, countries under support programmes from international institutions like the IMF are required to report QFEs and contingent liabilities in the financial statements, for these to be recorded in the national budget overseen by Parliament. 

Based on the review of systematic disclosures, the MSG should consider what additional information should be reported and agree on reporting templates for each of the relevant entities deemed to have information related to QFEs linked to extractives revenues. The reporting templates should be tailored to each of the specific types of QFE identified and to the individual reporting entities, such as for the Ministry of Finance and specific SOEs. 

Disclosures of QFEs should include the value of payments for each type of QFE for the year under review, disaggregated by project, company, revenue stream and receiving entity. Templates should reflect this level of detail, ensuring disaggregated data as per Requirement 4.7. The MSG is encouraged to provide clear guidance alongside the reporting templates and to conduct capacity-building workshops for reporting entities.

The MSG should ensure that all SOEs and relevant government entities disclose their QFEs fully and consistently. To achieve this, the MSG could consider providing training and technical support to reporting entities where needed. Close collaboration between the MSG and the management of SOEs is needed to ensure that a robust reporting process is designed. 

• IMF (2007). Manual on Fiscal Transparency: 2007 Revised Edition.
• International Budget Partnership. Guide to Transparency in Public Finances: Quasi-fiscal activities.
• Natural Resource Governance Institute (2018). Guide to Extractive Sector State-Owned Enterprise Disclosures.
• Transparency International (2014). Public financial management topic guide.